A fixed period annuity pays an income for a specified period of time, such as ten years. The amount that is paid doesn’t depend on the age (or continued life) of the person who buys the annuity; the payments depend instead on the amount paid into the annuity, the length of the payout period, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the pay-out period.
A lifetime annuity provides income for the remaining life of a person (called the “annuitant”). A variation of lifetime annuities continues income until the second one of two annuitants dies. No other type of financial product can promise to do this. The amount that is paid depends on the age of the annuitant (or ages, if it’s a two-life annuity), the amount paid into the annuity, and (if it’s a fixed annuity) an interest rate that the insurance company believes it can support for the length of the expected pay-out period.
With a “pure” lifetime annuity, the payments stop when the annuitant dies, even if that’s a very short time after they began. Many annuity buyers are uncomfortable at this possibility, so they add a guaranteed period—essentially a fixed period annuity—to their lifetime annuity. With this combination, if you die before the fixed period ends, the income continues to your beneficiaries until the end of that period.
Sunday, July 20, 2008
Accelerated Death Benefits
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
A-SHARE VARIABLE ANNUITY
A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge.
Variable annuity
As a financial product sold by life insurance companies, it's no surprise that variable annuities have similar features to life insurance. Variable annuities are a hybrid financial product, combining features of mutual fund investing and life insurance.
A variable annuity is a contract. You buy the contract with an initial purchase payment, investing in a variety of subaccounts that the insurance company sells. Similar to investing in a mutual fund, you should always read the prospectus of a subaccount before investing.
Some of the features that variable annuities share with life insurance include:
Designating a beneficiary. Life insurance policies and variable annuities require you to designate a beneficiary. In the event you die during an annuity's accumulation period, or before a certain point in the payout period, your beneficiary receives a death benefit.
Your beneficiary is generally entitled to receive the greater amount of the annuity's contract value or value of purchase payments. Death benefits are paid as a lump sum or as an annuity. For an extra charge, you can usually buy an enhanced death benefit.
Payments based on investment performance. When you buy a life insurance policy, you pay a premium. With permanent life insurance, your premiums accumulate a cash value. Depending on the type of permanent life insurance coverage, some of your premiums are invested in riskier investments such as stocks or bonds. Universal and variable universal life insurance policies let you switch to flexible premiums, or stop paying premiums temporarily, when your cash value grows to an adequate level.
Cash value accumulates to provide continued coverage. With permanent life insurance, the cash value of your policy continues to provide insurance coverage even if you stop making premiums. (If you're buying term life insurance, your premiums do not accumulate a cash value and your policy lapses when you stop paying premiums.) In other words, the cash value is a reserve of funding future premiums. This reserve gives you flexibility in paying your premiums.
It's helpful to think of a variable annuity's contract value in a similar way. The contract value is the source of annuity payments when the payout period begins. If investment performance is better than expected, it boosts an annuity's contract value, giving you a respite from additional purchase payments.
Optional premiums buy extra or enhanced coverage. With life insurance policies, you can often pay a premium to guarantee a minimum death benefit. Variable-annuity contracts also include options (at an extra charge) for guaranteeing a minimum annuity payment or death benefit. Guarantees are insurance in their purest form: a chance for you to swap uncertainty for certainty with an insurer that is willing to underwrite that risk in exchange for a fee.
A variable annuity is a contract. You buy the contract with an initial purchase payment, investing in a variety of subaccounts that the insurance company sells. Similar to investing in a mutual fund, you should always read the prospectus of a subaccount before investing.
Some of the features that variable annuities share with life insurance include:
Designating a beneficiary. Life insurance policies and variable annuities require you to designate a beneficiary. In the event you die during an annuity's accumulation period, or before a certain point in the payout period, your beneficiary receives a death benefit.
Your beneficiary is generally entitled to receive the greater amount of the annuity's contract value or value of purchase payments. Death benefits are paid as a lump sum or as an annuity. For an extra charge, you can usually buy an enhanced death benefit.
Payments based on investment performance. When you buy a life insurance policy, you pay a premium. With permanent life insurance, your premiums accumulate a cash value. Depending on the type of permanent life insurance coverage, some of your premiums are invested in riskier investments such as stocks or bonds. Universal and variable universal life insurance policies let you switch to flexible premiums, or stop paying premiums temporarily, when your cash value grows to an adequate level.
Cash value accumulates to provide continued coverage. With permanent life insurance, the cash value of your policy continues to provide insurance coverage even if you stop making premiums. (If you're buying term life insurance, your premiums do not accumulate a cash value and your policy lapses when you stop paying premiums.) In other words, the cash value is a reserve of funding future premiums. This reserve gives you flexibility in paying your premiums.
It's helpful to think of a variable annuity's contract value in a similar way. The contract value is the source of annuity payments when the payout period begins. If investment performance is better than expected, it boosts an annuity's contract value, giving you a respite from additional purchase payments.
Optional premiums buy extra or enhanced coverage. With life insurance policies, you can often pay a premium to guarantee a minimum death benefit. Variable-annuity contracts also include options (at an extra charge) for guaranteeing a minimum annuity payment or death benefit. Guarantees are insurance in their purest form: a chance for you to swap uncertainty for certainty with an insurer that is willing to underwrite that risk in exchange for a fee.
Certificate of Insurability
A certificate of insurability is an insurance company's verification that you are entitled to receive insurance coverage. For life insurance, a certificate may require that you complete a health condition questionnaire and pass a health exam.
Term Life Insurance
A term life insurance policy provides a death benefit for a specific term, generally measured in years. Unlike permanent life, there is no buildup in cash value. When the coverage term expires, the policyholder buys a new term that matches his insurance needs. Since the policyholder is older, they will pay a larger premium to reflect their shorter life expectancy.
Term life insurance vs permanent life
The two main categories of life insurance are term and permanent life insurance.
Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.
You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.
A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)
Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.
You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.
A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)
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